Questor share tip: Gulfsands Petroleum on the road to Morocco

Until the start of last year, Gulfsands Petroleum’s business was performing
very well and management had significant operational success. However, its
main producing asset was in Syria and the company is now in the
process of transforming itself by moving into new territory.

Gulfsands operates an oil block in Syria, with a 50pc working interest.
However, the contract is currently in force majeure as a result of EU
sanctions. The situation in the Middle Eastern country is not improving if
anything, it appears to be on the verge of civil war. It is unlikely to
improve any time soon.

This is a shame, as management had built up a valuable business. The owner of
the other half of Gulfsands’ Syrian block was Emerald Energy, which Chinese
state-owned group Sinochem snapped up for $875m (£538m) in August 2009.
Syria accounted for around 30pc of Emerald’s revenues at that time.

Gulfsands’ management have responded by expanding outside Syria. As part of
this strategic shift, the company announced the acquisition of three new
onshore licences in Morocco earlier this week. They will be acquired through
the takeover of Cabre Maroc, a unit of private company Caithness Petroleum.

Gulfsands will pay Caithness $19m in cash, put aside $11.5m of financial
guarantees for future exploration commitments made to Morocco’s regulator,
and up to $11m for Caithness’s exploration costs on the two licences in
which it retains an interest.

The deal gives Gulfsands between 45pc and 75pc of shares in a number of
licences across the “Fes” and “Taounate” permits and provides access to
significant exploration potential, near-term oil production and multiple
drilling targets. The news is therefore very positive. Gulfsands plans to
use recently acquired seismic data to help drill up to nine wells on gas
targets from the second quarter of next year.

Gulfsands also has interests in two offshore exploration permits in Tunisia
and one in southern Italy. It also has a longstanding memorandum of
understanding with Iraq’s oil ministry to capture “flared gas”, which is
usually wasted by being burnt off at oil wells. A definitive contract is not
in place yet, however. Gulfsands also owns a small number of assets in the
Gulf of Mexico, which it is in the process of divesting.

The group’s balance sheet is relatively healthy as Gulfsands carries no debt
and had $106.3m of cash available as of June 30.

Following the closure of its Syrian operations, the group had an interest in
production of 322 barrels of oil equivalent per day (boepd) through various
stakes outside the country.

This compared with 10,923 boepd of production in the first half of last year.The
company still has revenues, although they are much reduced. In the first
half, revenue was $2.9m compared with $78.6m in the first half of 2011.

Regular readers will know that Questor does not usually recommend buying
shares in pure exploration plays. They tend to have a way of burning through
cash. Gulfsands does have some revenues coming in, but they are not
substantial.

The security situation in Syria cannot carry on forever although just how
safe is the title to Gulfsands’ asset there remains to be seen.

The shares are down significantly from highs of 401½p seen in January 2011.
Management are doing the right thing in their diversification strategy and
the shares could look very cheap if discoveries are made, so some investors
may wish to consider the shares for the more speculative part of their
portfolio. Questor, however, continues to keep a hold recommendation.

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